5 to Love, 5 to Hate

I’ve never been much for equivocation. In fact, there’s an old bit of Texas wisdom that I think are words to live by: “The chicken in the middle of the road gets run over.” The insight contained therein is quite applicable to the world of trading and investing. Let’s face it, there’s nothing sadder than a wishy-washy trader.

With this notion in mind, when asked to assess which investments to love and which to hate in the coming year, well let’s just say it wasn’t too difficult a task. I’ll start by telling you what I think are the best investments for 2011, followed by the worst. Plus, I’ll throw in the best ETFs to buy to profit from these investment trends.

Best: Gold

Yes, the yellow metal just hit an all-time high over $1,415 an ounce, but that could be a pittance if the Federal Reserve embarks on yet another round of quantitative easing. Now I’m not talking here about QE2, rather, I am referring to Chairman Ben Bernanke’s comments on CBS’ “60 Minutes.” The Fed chief said that the central bank might actually increase its stimulus effort, if necessary, to prevent the economy from lapsing into a second recession. Put another way, the Bernanke basically told the world that he wouldn’t be averse to implementing another round of quantitative easing, i.e., here comes QE3. 

Printing additional money would put even more pressure on the value of the U.S. dollar, and that would cause even more commodity price inflation going forward. That means gold will continue to go up, and ETFs such as the SPDR Gold Trust (NYSE: GLD) will be investments to love in 2011.

Best: Silver

For much of the same reasons as gold, silver also is an investment to love in 2011. We’ve already mentioned the Fed’s signal that it intends to keep that money spigot turned on, and that will continue to push commodity prices higher. 

But on its own, there is reason to love the bullish silver trade via an ETF such as the iShares Silver Trust (NYSE: SLV). Industrial demand for silver is forecast to increase 18% this year, according to industry consultancy GFMS, and it’s this kind of internal demand for silver that makes it such a compelling commodity holding.

Best: Inverse Bonds

The price of long-term Treasury bonds has fallen significantly since September. I expect the long end of the Treasury bond spectrum to continue struggling next year, and as such, we will likely see a significant rise in long-term interest rates (i.e., long-term bond yields). With all of the borrowing, we are going to continue needing just to keep up with our massive deficit, long-term interest rates are bound to go up in 2011.

Taking advantage of this trend is easy with the ProShares Short 20+ Year Treasury Fund (NYSE: TBF), or its leveraged cousin, the ProShares UltraShort 20+ Year Treasury Fund (NYSE: TBT). Both funds allow you to bet against the price of long-term Treasury bonds.

Best: Emerging Markets

2010 has been a banner year for emerging markets, particularly in select Asian and Latin American countries. I expect a continuation of this trend, as the economic growth that’s taking place in so many emerging countries will continue into next year and likely beyond.

Although stocks in the emerging markets have had a very strong run in 2010, relative to their U.S. counterparts, they actually trade at a discount. An ETF such as the iShares MSCI Emerging Markets Index (NYSE: EEM) is another investment to love in 2011.

Best: Small Caps

Like emerging markets, small-cap stocks have enjoyed a great run in 2010. Relative to their large- and mid-cap brethren, small caps have handily outperformed the market. As the economy improves in 2011, profit margins also will likely improve, and that’s great news for smaller companies that tend to outperform during periods of profit margin improvement. 

Investments such as the iShares Russell 2000 Index ETF (NYSE: IWM) are a great way to feel the love in small caps in 2011.

Worst: European Stocks

The fiscal problems in the euro zone seem to get worse everyday. First it was Greece, then Portugal and Spain, then Ireland, and now there’s trouble again in Portugal and Spain. The only truly fiscally sound country in Europe seems to be Germany, but the sovereign debt issues with its EU neighbors appear as though they’ll take the continent’s equity markets down. 

But while this is a sector to hate in 2011, you can still make money from it through buying put options on the iShares S&P Europe 350 Index ETF (NYSE: IEV), or buying the ProShares UltraShort MSCI Europe ETF (NYSE: EPV).

Worst: Euro

The fiscal woes in Europe have spilled over to the region’s currency, and like their equity markets, the euro is feeling the pinch of stretched balance sheets and the need for a cash infusion from the European Central Bank (ECB).

All of these problems will likely continue putting pressure on the euro in the coming year, and that means it’s an investment to hate for 2011. If you want to bet against the euro, a good way to do so is via the ProShares UltraShort Euro ETF (NYSE: EUO).

Worst: Mutual Funds

This is an investment that can be hated just about any year, but in what will likely be another volatile year for stocks, owning mutual funds is one category of investment that can be particularly hated in 2011.

While there are plenty of talented fund managers out there, you are much better off trading ETFs, individual stocks or options, as each gives you a lot more freedom to buy what you want, when you want, and at a much lower cost than most funds.

Unless you’re using a 401(k)-type account, mutual funds are a definite investment to scorn in the year ahead.

Worst: Treasury Bonds

As stated earlier, the changing zeitgeist in the bond market means that higher yields are on the way, and that means lower bond prices also are on the horizon.

When you consider all of the borrowing that has taken place so far by governments around the globe, and that will continue taking place, you just have to surmise that interest rates are bound to keep climbing. According to estimates from the International Monetary Fund (IMF), the amount of money that advanced-nation governments will need to borrow next year is a mind-blowing $10.2 trillion. These are debt levels unseen since the aftermath of World War II, and that borrowing is going to cause yields to soar and bond prices to fall.

Worst: Municipal Bonds

In addition to the overall spike in interest rates, municipal bonds are confronting a glut of new supply set to flood the market in 2011. The recession has caused many counties and municipalities around the country to suffer fiscal hardships and, as such, investors are increasingly reluctant to either buy new muni bonds, or to hold onto the ones they already own.

Despite the structured tax advantages munis offer income-oriented investors, they belong on the investments to hate list for 2011.